Maritime transport is the backbone of international
trade and a key engine driving globalization. Around 80% of global trade by
volume and 70% by value is carried by sea. International seaborne trade grow
and fall in tandem with the developments in world economy and global
merchandize trade. As per the latest UNCTAD report, in 2011 the world fleet tonnage
grew at about 10% against the 4% growth rate of global seaborne trade, as the
ship owners continued to take delivery of the vessels ordered prior to the
economic crisis.
In line with above trend , container trade also
decelerated to 7.1% in 2011, down from 12.8% in 2010, whereas the tonnage grew
at 7.7% to make up 12.9% of the world tonnage ( Source: UNCTAD’s Maritime Review Report 2012). As the supply , ie, the
vessel capacity, outstripping the demand, ie, the shipped volume, the freight
rate fell to unprofitable levels for most Liners in 2011 and the beginning of
2012.
As a consequence of the continued oversupply of
tonnage in 2012, the fleet capacity and
freight rates fluctuated so violently that even the high profit making lines
plumbed into heavy losses. The
investment in large capacity ships accelerated competition among liners to the
extent that they were even willing to accept freight rates below or close to
operating cost. According to Drewry Maritime research, container shipping sector
made an estimated collective loss of USD 6 billion in 2011! The financial status
of the container liners were not look so positive in 2012 too, as many lines reported financial losses in the first quarters of 2012 .
Carriers have invested in ever larger ships to
benefit from economies of scale which in turn add to the general oversupply of
capacity and put further downward pressure on freight rates. Lines are taking different approaches to
confront the oversupply and worsened financial performances. This paper covers
the general measures taken by the liners for matching the oversupply to the
volatile demand.
1. REGULATE NEW ORDERS TO CHECK ON CAPACITY GROWTH
The world fleet continued
to expand to reach 1,534 million dwt. in January 2012. However the drastic
downturn in new orders due to the world economic crisis has led to a reduction in the world order book by
one third during the 2008 -2012 period. The order book in early 2012 is down to
approximately 21% of the existing fleet tonnage compared to 44% four years
earlier.
According to Clarksons, container ships on order is
3.5 million TEU which is equivalent to 22% of the current fleet. This is still
relatively large but the figure has come down significantly from the year 2008 (1209) to 2011 (602). However, the order book for container ships
actually increased between the period of end 2010 (566) to end 2011(602) as
some of the leading container liners placed new orders for ships above 10,000
TEU in the quest for economies of scale and cost reduction.
Alphaliner
statistics show that world No.1 Maersk and No.2 MSC between themselves
accounted for more than half of the total new capacity in past one year. At the beginning of 2011, Maersk Line announced that it has ordered
twenty 18,000 TEU “Triple-E Class Ships”. Also, with a view to achieving
economies of scale, the No.3 liner CMACGM reportedly is in negotiation with
shipyards in Korea for enlarging 5 ships from their original specification of
12,800 TEU to a new specification of 16,000 TEU. Evergreen, the only line which
had not invested in ultra-large container ships till recent timess, has placed
an order for 10 vessels of 13,800 TEU each in early 2012.
2. TERMINATE
OR POSTPONE ORDERS TO SLOW DOWN CAPACITY RELEASE
Although the major shipbuilders are reluctant to
cancel or postpone deliveries, almost all shipping companies restructured, to
the possible extent, the order book in 2009. Many deliveries were postponed,
cancellations were few.
In this context it is worth to mention Maersk
Line’s chief commercial officer Mr. Lucas
Vos’s words here (Container Shipping & Trade ,August
2012) ,
“If I look at
our order book now, it is about 18-20% of
what we currently have on the water, and that is healthy. Earlier in the year
(2012) we decided not to take the third option on the third batch of the
Triple-E vessels, so we are going with 20 of
that size of vessel rather than 30.
That also
gave a signal to market that we are happy with the market share that we have.
We are going to defend that, but it is not our ambition now to grow a lot more
than that. I think that if we had ordered that third batch of 10, that would
have given an inconsistent sign because it would have implied growth. Even with
the vessels that will be delivered, we can absorb that extra capacity without
growing our market share.” he said.
3. SLOW
STEAMING FOR CPACITY ABSORBTION AND BUNKER COST SAVINGS
Various degrees of slow steaming have become
standard practice for most container services as a way of controlling
escalating fuel cost at a time when demand has stagnated and deliveries of new
vessels have created surplus capacity. The global containership fleet has been
reducing sailing speed from 24-25 knots to 21 knots (slow steaming), 18 knots
(extra-slow steaming) and to 15-16 knots (super-slow steaming) so that it will
be necessary to deploy more number of vessels to meet the same demand or to
maintain the same frequency. Alphaliner,
Paris based industry analyst, estimated that by December 2011 around 7 million
teus had been absorbed, which otherwise would have been a surplus, through this measure. Slow steaming also
helped the liners to make huge savings on the bunker cost when the
international fuel cost was rocketing up. As per reports , the bunker cost (380
cst) was under USD100/ tonne in July 2009, which had gone up to USD714 by 2012
beginning ! As of now, the main parameter which determines the sailing speed of
a vessel would be the fuel consumption and therefore the operational cost.
Using the slow steaming technique, in 2011, Maersk
Line launched Daily Maersk programme providing customers with a ‘conveyor belt’
service between selected ports in Asia and Northern Europe. This new
product was born out of necessity – to cope with the rising bunker cost and to
soak up the extra capacity due to new vessel deliveries.
4. TEMPORARILY
WITHDRAWING EXISTING TONNAGE FROM THE SERVICE
As per UNCTAD report , in early 2012, about 5% of
the container ships were idle which include 6 ships larger than 10,000 TEU. A
containership which is not participating in a regular service for a period is
said to be idle. Continuing growth in global container capacity coupled with
sluggish volume forced liners to lay up ships to manage capacity. The fuller
the ship, the more likely rates will rise and vice versa.
Lines are taking different approaches to confront
losses. The Malaysian shipping company MISC closed down its container
activities completely in early 2012. Some other liners skipped several
individual sailings and suspended many services as a measure to manage over
capacity.
In early 2012, Maersk had skipped several
individual sailings of their Asia – Europe services . Also they have completely
stopped booking on their Europe – Asia trade in March’12. By this measure they
have withdrawn about 20% of their capacity from the Asia – Europe trade. In
June’12 MSC stopped accepting booking on the Europe – Asia trade for a 3 week
period. COSCON , YML, K Line and Hanjin too withdrawn capacity (NE1,NE4,MD1
services) from the Asia-Europe trade. Moreover , Evergreen and Hanjin confirmed
that they will no longer be launching a new service in this trade, instead they
would prefer to maintain the existing services. This measure along with several
general rate increase (GRI) attempts helped liners to keep up the demand in
Asia-Europe , east & west haul, trades.
5. DEMOLISH
OLDER VESSELS TO ALLEVIATE OVERCAPACITY IN THE MARKET
Carriers preferred to demolish vessel rather than
selling it for other owner as the second hand owners would be competing for
same cargo in the market. Also, as the
new vessels are more cost and energy
efficient , many vessel owners found it more profitable to sell older ones for
scrap instead of continue to trade them at a financial loss.
As per Containerisation
International (August,2012), about 62 container vessels with a combined
slots count of just over 1,33,112 TEU had been sold for scrapping in the first
6 months of the 2012. Majority of ships which demolished recently were older
than 25 years of age. General practice is that the container and general cargo
ships are kept in business beyond the age of 30. However, lack of employment
prospects is forcing the owners to sell younger ships for demolition. In May
2012, a 13-year old ship was sold for demolition, making it the youngest vessel
scrapped since the economic crisis in
2008.
Most of the
ship recycling takes place in Asia, India leading with 33%of GT demolished,
followed by China (23.9%), Bangladesh (22.4%) and Pakistan (13%). India is
specialised in scrapping of container and other dry bulk cargo. (Source – UNCTAD , Review of Maritime
Transport, 2012).
6. REGROUPING
OF LINERS FOR CONSOLIDATION AND RESTRUCTURING OF CAPACITY
The investment in large capacity ships accelerated
competitions among the liners . High volume routes, in particular the Asia –
Europe trade route, experience heavy competition as operators place their
biggest ships in these route for economy of scale and more regular services. Furthermore,
with a predicted growth rate of 25% for
the above- 8000 TEU vessels in 2012,large scale capacity will continue to enter
this market segment. ( Source – UNTCTAD’s Review
of Maritime Transport 2012 )
As a result
, shipping lines formed alliances to share costs , optimum utilisation
of capacity and streamline their operations. All major lines have in recent
years increased vessel sharing arrangements with other carriers. Classic
example of this trend is the partnership of world No.2 liner Mediterranean Shipping Co (MSC) and No.3
liner CMA CGM . This partnership cover the Asia –Europe , Asia-Southern Africa
and all South American Services. Both companies are known as strong independent
liners, especially MSC, which grows organically and maintained its family
ownership throughout the crisis period. With this unexpected announcement they literally
stunned the observers!
Similarly the G-6 Alliance formed by merging the
Asia-Europe services between The Grand Alliance (Hapag-Lloyd, NYK and OOCL) and
The New World Alliance ( HMM, APL and MOL) . And Evergreen joined force with the
CKYH (COSCO, “K” Line, YML , Hanjin) Alliance to cope with the increasing
competition. The Chilean carrier CSAV in 2012 increased their share of jointly
operated services from 30 % to more than 90%.
Below table shows westbound vessel capacity of individual line’s as well
as new alliances’ from Asia to Northern Europe as on 01st April 2012.
As per latest UNCTAD report , feeder operators have
also created alliances to better defend themselves against competition from the
larger shipping lines. Several industry experts suggest that such mergers among
shipping lines would be good for carrier profitability. However, these groupings
will make it difficult for the medium to small individual lines with
comparatively smaller vessels to remain afloat and competitive.
AGGRESSIVE
CAPACITY MANAGEMENT PROGRAMME IS THE NEED OF THE HOUR
The global economic and financial slow down along
with continued growth in fleet capacity and sluggish freight volume hit
container trade hard. Financial performance of many liners shown signs of
improvement in 2012 but is still far from satisfactory. As per the trade
experts, significant improvement in demand growth in 2013 is not expected. However,
the supply of new super-generation vessels will continue to exceed demand
growth, even though carriers have taken various measures to control the
capacity growth.
The rising bunker prices and other operating costs
continued to threaten carriers’ much needed financial recovery. According to
many financial statements, fuel costs are about 60% of voyage cost , needless
to mention the increased bunker price rubbed more salt into the already
bleeding wound. This in turn lead to adoption of strategies like deployment of
energy efficient megaships, super slow steaming , vessel lay- ups and demolition of even younger
vessels.
Another major problem for the industry is that the
new generation mega vessels have only limited deployment options. They are
mainly restricted to the Asia-Europe trade, which continues to struggle due to
the sovereign debt crisis in Europe and other difficulties facing the advanced
economies. Indeed, the carriers have continued to revamp the service strings
and omit sailings to protect the revenues.
The container trade plagued by overcapacity and
poor financial performance is still sailing through troubled waters. To tide
over the situation , for a better
financial performance, carriers need to adopt to more aggressive capacity and
cost management programmes.
